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Brian A. Wolfe
Assistant Professor of Finance
School of Management
University at Buffalo
Email: bawolfe at buffalo dot edu

Published Papers

Does Banking Competition Affect Innovation?  (PDF2015 Journal of Financial Economics (with Jess CornaggiaYifei Mao, and Xuan Tian), Vol. 115 (1), 189-209

We exploit the deregulation of interstate bank branching laws to test whether banking competition affects innovation. We find robust evidence that banking competition reduces state-level innovation by public corporations headquartered within deregulating states. Innovation increases among private firms that are dependent on external finance and that have limited access to credit from local banks. We argue that banking competition enables small, innovative firms to secure financing instead of being acquired by public corporations. Therefore, banking competition reduces the supply of innovative targets, which reduces the portion of state-level innovation attributable to public corporations. Overall, these results shed light on the real effects of banking competition and the determinants of innovation.

Working Papers

Crowding Out Banks: Credit Substitution by Peer-to-peer Lending (with Jess Cornaggia and  Woongsun Yoo)

Through superior technology, financial technology (FinTech) firms may expand credit markets. Alternatively, consumers may substitute one credit provider for another, generating adverse selection problems for incumbent lenders. We analyze the unsecured consumer loan market and identify the influence of FinTech lending on commercial banks using a novel approach that takes advantage of regulatory restrictions for FinTech borrowers and investors. We show that high-risk FinTech loans substitute for bank loans while low-risk loans may be credit expansionary. However, the influence on banks is heterogeneous. Our results highlight the changing landscape of financial intermediation and the regulatory challenges faced by FinTech firms.

Innovation at State-Owned Enterprises (with Bernardo Bortolotti and Veljko Fotak)
We investigate the impact of state ownership on the innovativeness of firms, as measured by the number, quality, and value of the patents produced. In a sample of listed European firms, we find that minority government ownership increases investment in research and development, especially for financially constrained firms and during “normal” macroeconomic conditions. Yet, government control leads to the opposite effect, by imposing myopic goals and complicating access to private equity markets. Overall, state-owned enterprises (SOEs) produce fewer patents per dollar invested and about 10% fewer patents in absolute terms. When comparing SOE patents to private-sector patents, we find no difference in patent quality as measured by the number of citations received per patent or by the market reaction at patent publication. Furthermore, we find no increase in the number of patents focused on sustainable technologies, suggesting that SOEs do not emphasize innovation that produces public goods. 

Allocation Incentives of Marketplace Lending Platforms during the IPO of Debt Securities (with Li-Ting Chiu and Woongsun Yoo)
  • Paper - Comming Soon
Marketplace lending platforms create new (debt) securities similar to the underwriters of an IPO. For both, revenue (origination fees to marketplace lending platforms and underwriting spread to IPO underwriters) is proportional to the volume of securities created. Yet, when it comes to the allocation of these newly issued securities, marketplace lending platforms claim to randomly allocate securities among investors while IPO underwriters preferentially allocate. We provide evidence that the allocation behavior of marketplace lending platforms is not random and favors certain investors at the expense of others.  Motivated by the underwriter literature and originate-to-distribute models of intermediation, we explore channels to explain why marketplace lending platforms might preferentially allocate securities to particular investors. Our results suggest a tension between adverse selection issues within the institutional market that force platforms to preferentially allocate and an opposing channel caused by heavy securitization activity of the marketplace lending notes which reduces the platforms’ preferential allocation of loans to institutional investors. 

The Impact of FinTech Regulation: Underpricing and Secondary Market Flipping in Marketplace Lending (with Shyam Venkatesan and Woongsun Yoo)
    Paper - Comming Soon
Marketplace lending platforms (MLPs) function similar to IPO underwriters by matching capital demanders with suppliers of capital and extracting a flat fee as compensation.  Using the lens of the underwriter literature, we examine motives of MLPs and find evidence that they underprice the primary offering of debt securities.  This discount appears to be driven by the need to circumvent complex regulatory restrictions on investor participation.  Our evidence suggests this discount allows primary market investors to flip securities into the secondary market for notes, thus providing the platform a mechanism to access restricted investors.  We provide evidence that the MLP discount is unwound as investor restrictions are removed.  Our results underscore the parallels between new financial technology (FinTech) firms and traditional agents such as underwriters but also the unintended consequences of complex FinTech regulation.   

Financial Intermediation and Innovative Firms  

Innovation is important, resource intensive, and is particularly difficult for outsiders to evaluate. Some financial intermediaries may have the expertise to overcome the information asymmetry associated with innovative firms and may be better equipped to manage the adverse selection risk. Banks may play an important role in innovative firm financing yet recent work suggests that the multiple waves of regulatory changes to the banking system appear to provide conflicting implications. I use loan level data to disentangle some of the underlying mechanisms and show that new lender entry forces incumbent lenders to increase their loan flow to local innovative firms by as much as 86%. They also have a 26% higher probability of issuing loans to local "fringe" firms - riskier, first-time borrowers that afterward produce their first cited patent. However, these effects are muted by mergers within the banking industry that cause lenders to decrease their flow of loans to innovative firms.

Works in Progress